I love my tobacco stocks! Some people don’t invest in “sin” stocks like tobacco, casinos, and cannabis companies. I can separate my personal values from my investing references. To each their own.
I also love investing in Mortgage Real Estate Investment Trusts (mREITs). These companies pay high yields but are extremely sensitive to interest rates.
But which products is the high-yield king: tobacco stocks or mREITs? Today, I want to evaluate the merits of both income products so you can decide for yourself. Let’s begin.
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Bringing the heat with tobacco stocks. One of my first dividend-paying stocks was Altria (MO). I purchased these stocks five years ago, and it is still one of my favorite stocks.
I love tobacco stocks because I understand the product. People still smoke tobacco, and most of these companies are moving toward smokeless products as a future hedge.
I invest in four tobacco stocks: Altria (MO), Phillip Morris (PM), British American Tobacco (BTI), and Vector Group (VGR).
The main reason for investing in tobacco stocks is the high yields. Currently (August 4, 2024), the yields are MO (7.68%), PM (4.41%), BTI (8.15%), and VGR (5.97%).
You can also use tobacco stocks as vehicles for dividend growth investing (DGI). The main goal of DGI is to use the four principles to grow your income and capital gains.
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However, you must be careful with tobacco stocks. They can be cyclical, meaning there are good and bad entry points. The news cycle on tobacco stocks is insane.
You must understand the current news cycle and the average yield of these products. For example, I will only purchase Altria when the yield exceeds 8%.
If Altira yields 5%, then the price is probably too high for an entry. However, if you can find a good place to invest, jump in. Then, you can reinvest the dividends and let the power of compounding take over.
In December 2023, British American Tobacco dropped over 10% in a couple of days, making for a great entry point. I didn’t have money to tap into quickly, so I now keep some cash in money market funds.
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Getting into real estate with Mortgage REITs. I love mREITs because they offer high yield and predictable performance. mREITs don’t own homes or properties; they purchase mortgage-backed securities.
In reality, mREITs are the most straightforward way for the average investor to invest in mortgage-backed securities (MBS).
Why are MBSs important to your portfolio? MBSs offer higher yields than treasury bonds without adding too much risk. mREITs also use leverage to increase their yields—something that would be tough for the average investor.
There are definitely good times and bad times to invest in mREITs. Again, yield can be a factor. However, it’s better to understand how interest rates and bond prices work.
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I am currently scoping up mREITS because mortgage rates are hovering around 6-7%. If the Federal Reserve lowers interest rates to 3%, these 7% mortgage-backed securities will be in high demand.
This will increase the price of MBS. Bond prices and yields move in opposite directions. mREITS allows you to play this game safely via the stock market.
I wouldn’t use mREITs as dividend growth stocks or automatically reinvest their dividends. I would look at current interest and mortgage rates, share prices, and future expectations. There is a lot of nuance to investing in mREITs.
My two favorite mREITs are the two biggest companies, AGNC Investment Corp. (AGNC) and Annaly Capital (NLY)—they yield 14.29% and 13.16%, respectively.
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The rule of 72. When investing in high-yield products, I like to refer to the rule of 72. The rule states that if you divide 72 by the yield, it will tell you how long it will take to return your initial investment in dividends.
For example, if BTI yields 8%, it would take nine years to return my money via dividends. This rule allows me to make decisions based on income, not price appreciation.
Honestly, as long as I keep receiving dividends, I don’t worry too much about the share price. Buying stocks when they are low is a bonus feature, but I primarily want the income these products produce.
Tobacco stocks vs. Mortgage REITs. Which product is best for your portfolio? Of course, this answer depends on your investing goals, timelines, and risk tolerance.
Tobacco stocks are by far the easiest to follow and purchase. You understand the product category, and they offer high yields.
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The companies typically raise their dividend payments every year, and you can reinvest into each stock without following the news too seriously.
Mortgage REITs require much more sophistication, knowledge, and patience. They offer higher yields, and you’ll get your money back much quicker than tobacco stocks.
However, investing in Mortgage REITs will give you a much broader understanding of interest rates, the housing market, and bond spreads (the difference in yield between treasury bonds and mortgage rates).
With mortgage REITs, it’s fantastic to put your money into something and know the exact income you will receive. The share price may vary wildly, but you can trace the reason to interest rates, book value, and bond prices.
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Tobacco companies offer share price appreciation despite being slow-moving entities. Although most of their growth is behind them, they still rake in billions of dollars in profits.
Investors consider cigarettes recession-proof because most people prioritize them over other discretionary services like going to restaurants or on vacation.
Using them together. One offers higher yields, and the other compounding growth. You can use them together to generate massive income and minor growth.
However, if you are smart about bonds and stocks, you can use them both to achieve bond growth investing and dividend growth investing.
Few people understand that bonds can grow just as much as dividend-paying stocks. Part of bond growth investing is reinvesting your interest payment into other high-yielding products.
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If you purchase $20,000 worth of AGNC, it will pay you $2858 in annual dividends. You can invest that money in BTI, and once BTI pays you, you can invest it in index funds.
Conclusion. The best way to win with mREITs is to purchase them at their lowest point and highest yields. Then, use the high income to diversify your portfolio.
Tobacco stocks allow you to reinvest your dividends or purchase other stocks. The companies value the shareholder by increasing their dividend payments.
Because the companies relieve some of your burden by increasing the dividends, you open yourself up to new opportunities.
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I consider both products income-investing vehicles. However, they come from two different worlds. mREITs are akin to bonds (interest rates), and tobacco companies are stocks (consumer behavior).
They are different but complementary because we need stocks and bonds to become great investors. I leverage both types of stocks to obtain high yields and reinvest in various other products.
If you are risk-averse, tobacco stocks are your best option. If you love to follow rates and markets, you can use mREITs as an income generator. Use both to leverage the stock and bond markets. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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